Six reasons why 2016 could be another volatile year for investments

2015 wasn’t a great year for investments. Despite the UK stock markets hitting an all-time high in April, the FTSE 100 ended the year almost flat. Other develop markets fared a bit better, but emerging markets continued their downward path, losing almost 10%. Bonds, on average, made nothing either*.

Can we expect a better 2016? Personally I’m quite cautious and think the year could be just as volatile. In no particular order, here are six reasons why:

  1. Interest rate rises have begun in the US – while markets generally took in their stride the first interest rates rise in the US for almost a decade, they don’t like the unknown and that is what we face with the normalisation of monetary policy’. It’s the frequency and velocity of any further rises, which are now all-important. The UK may well follow suit later in the year.
  2. There are still question marks over China, which has started a currency war in its battle to keep economic growth alive. Gradual depreciation of the Renminbi is already putting deflationary pressure on the West. Closer to home, any problems in China have a knock-on effect across Asia and, with the Chinese stock market falling 7%, and trading automatically suspended already in 2016, the outlook isn’t great.
  3. The first two issues mean emerging markets are likely to continue to struggle. Whilst a lot of them were, no doubt, experiencing ‘Fed Fatigue’ and are rumoured to have urged the US to get on with a rate rise at the last G20 summit, a turnaround doesn’t look imminent. The risk of emerging economies being downgraded, and defaults increasing, may continue for some time.
  4. With emerging markets still in the doldrums and growth in the developed world muted at best, demand for commodities is also likely to be limited, keeping pressure on prices. Earlier in the year, Neptune went as far as saying that oil prices could stay this low for a decade or more.
  5. The ‘Greek problem’ hasn’t gone away – it’s just been superseded by other matters in the headlines. It looks like there could be just as much uncertainty in Spain now, following an inconclusive election and the likelihood of another having to be called. Super Mario still needs to do ‘whatever it takes’ to sort out Europe and market expectations (and therefore the risk of disappointment) are high.
  6. Finally, there’s politics and a few important events. As mentioned, the Spanish may have to go back to the polls. The political scandal in Brazil may force the same. The big one is in the US in November and it is possible that the UK’s referendum on Europe could come early – 15th September as suggested by an industry peer a few weeks ago! Let’s not forget all the problems in the Middle East, either.

With so much uncertainty it is unlikely we’ll see markets go up in a nice steady straight line! However, with volatility comes opportunity and it will be possible to make money. For the more risk-averse investor, targeted absolute return funds may be worth a look. They can add a good level of diversification to a wider portfolio and the good ones have achieved their stated aims. It’s a very diverse sector, so you need to look closely at each fund before investing.

My favourites include: Church House Tenax Absolute Return Strategies, Henderson UK Absolute Return, Premier Defensive Growth and Smith & Williamson Enterprise.

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.